Default Risk Rises for Foresea, Evergrande

(Beijing) — Foresea Life Insurance Co. and Evergrande Life Insurance Co., two of China’s heavyweight insurers, are at growing risk of defaulting on policy claims, mainly due to rapid increases in sales of short-term, high-yield products and speculative stock investments, according to the companies’ respective newly released solvency reports.

Foresea Life’s solvency ratio — the size of its overall capital relative to insurance claims — fell to 112.47% in the fourth quarter of 2016, down from 143.93% in the previous quarter, according to its recent solvency report. Meanwhile, the solvency ratio of Evergrande Life dropped to 109.68% in last three months of 2016, close to the minimum regulatory bottom line of 100%, and down from 179.73% a quarter earlier.

Since mid-2016, the China Insurance Regulatory Commission (CIRC) has taken measures against the two insurers, suspending Foresea Life from selling new universal life insurance policies — insurance that provides low coverage but with investment returns — and freezing Evergrande Life’s investments in the country’s stock market.

In December, the insurance watchdog deployed a team of regulators to carry out spot checks on the two companies over issues that include corporate governance, financial status, insurance compliance and the use of capital.

For the first 11 months of 2016, Foresea Life received 77.6 billion yuan ($11.3 billion) from premiums of universal life insurance policies, accounting for 79.95% of its gross premiums income, according to CIRC data. Evergrande Life received 49.2 billion yuan in universal life insurance policy premiums in the same period, which represents 92.59% of its total premiums.

Foresea Life said in the report that it was pushing ahead with a business transformation, leaning toward selling more long-term cash value insurance policies that act more like savings plans.

In case of liquidity pressure caused by mass insurance claims, Evergrande Life said the company had invested part of its capital in assets that could be converted into cash quickly, such as money market funds and short-term deposits. The company is also considering selling bonds to raise capital.

Chen Wenhui, deputy chairman of the CIRC, said on Wednesday that China was still facing downward pressure on its economic growth, and low interest rates and scarcity of profitable assets posed challenges for insurers trying to manage their assets and liabilities. Chen said that the short-term liquidity risks that some small and midsize insurers faced could be a cause for great concern.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)